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No buck for the bang: revisiting the military-growth nexus

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Abstract

This paper investigates the empirical relationship between military spending and economic growth in a large panel of advanced and developing countries over the period 1984–2014, with a particular focus on whether the growth impact of military expenditures varies with the type and level of security threats. Although there is extensive literature on the military-growth nexus, there is still no consensus on the nature and magnitude of this relationship. Using an expansive dataset and controlling for country-specific effects and potential endogeneity, we revisit this issue and reach two firm conclusions. First, military spending has no statistically significant direct (positive) effect on growth. Second, the nature and level of security threats do not alter the relationship between military spending and growth. Overall, the empirical results documented in the study suggest that military spending is simply not important or large enough in most countries to have a meaningful impact on growth.

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Notes

  1. Levine and Renelt (1992) and Bleaney et al. (1999) show that empirical results are sensitive to the five-year averaging of GDP growth usually applied to control for business cycle effects and that the use of annual data yields more reliable estimates.

  2. The time dimension of our dataset actually starts from 1970, but the empirical analysis is based on the period 1984-2014 because of the inclusion of institutional variables from 1984 onwards.

  3. Acemoglu (2009) provides a detailed overview of the evolution of endogenous growth models.

  4. The list of countries is provided in Appendix Table 2.

  5. The estimations results are robust to the inclusion of these extreme values.

  6. Collier and Hoeffler (2004) and Miguel et al. (2004) propose the onset of armed conflict as an instrument for military spending. However, this would not allow us to explore whether the growth impact of military spending varies with the level and nature of threats.

  7. The difference GMM approach of Arellano and Bond (1991), which uses only the first difference equation, yields similar results but with reduced statistical significance for some variables.

  8. The initial level of real per capita income and educational attainments are treated as predetermined variables, while the type of political regime is considered to be weakly exogenous and others are included in a vector of potentially endogenous variables.

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Acknowledgements

This paper benefited from helpful comments and suggestions by two anonymous referees and participants at a seminar at the Fiscal Affairs Department of the International Monetary Fund (IMF). The views expressed herein are those of the authors and should not be attributed to the IMF, its executive board, or its management.

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Authors and Affiliations

  1. International Monetary Fund, 700 19th Street, NW, Washington, DC, 20431, USA

    Serhan Cevik

  2. University of Pennsylvania, 3819 Chestnut Street, Suite 310, Philadelphia, PA, 19104, USA

    John Ricco

Authors
  1. Serhan Cevik
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  2. John Ricco
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Correspondence to Serhan Cevik.

Appendix

Appendix

See Tables 2, 3 and 4.

Table 2 List of countries
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Table 3 Summary statistics by income group.
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Table 4 Robustness checks.
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Cevik, S., Ricco, J. No buck for the bang: revisiting the military-growth nexus. Empirica 45, 639–653 (2018). https://doi.org/10.1007/s10663-017-9380-8

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